Major economies cloud policymakers’ local vision

The Reserve Bank of Australia faces the task this week of absorbing the consequences of the Greek election result to determine whether it needs to take out more insurance against potential fallout in Australia or stay put.

Having shunned the market’s view that a European calamity was all but inevitable, central bank governor
Glenn Stevens
and his board opted this month for a modest 0.25 percentage point reduction rather than a cut twice that size.

Today, as markets open after the Greek vote, the bank will get a good sense of whether it made the right call.

Westpac chief economist
Bill Evans
, who is visiting clients in Germany this week on his three-week tour of the continent and the UK, said there appeared to be no consensus on: whether Greece would leave the euro; what might be needed to keep Greece in the currency; and whether the debate had moved on to larger worries about Spain and Italy.

“My disturbing impression to date has been that meetings have not imbued me with any comfort that there is a clear logical plan for European stability," he said.

“In short, I have not seen anything yet to sway my view that Europe is likely to be a series of rolling Band-Aid bailouts and crises, while the Germans contemplate their options."

RBA policymakers have repeatedly warned that Europe would remain a potential source of instability, particularly because of concern about fiscal stability and the continent’s banking system.

Last week’s data reinforced signs that Australian consumers and businesses are highly attuned to events in Europe. Surveys of both consumer and business sentiment have changed little despite the central bank’s interest rate cuts and very strong signs of robust domestic growth.

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“The failure of business and consumer confidence to respond to the RBA rate cuts highlights the pervasive effects of deleveraging against a backdrop of intense global uncertainty," Citigroup economist Paul Brennan said.

Analysts are looking to the publication tomorrow of the minutes from the June Reserve Bank meeting for clues as to whether policymakers had countenanced a larger cut or no change in policy.

Either possibility could trigger a re-evaluation by financial markets about the bank’s overall policy bias.

The RBA is expected to keep rates on hold at 3.5 per cent at its July meeting, according to 17 of 20 economists surveyed by Bloomberg News on Friday.

On the same day, financial markets had priced in a 74 per cent chance of a reduction in the benchmark rate to 3.25 per cent.

Westpac economists are among forecasters expecting the central bank to resume its rate-cutting cycle next month, though they concede there is a chance policymakers may wait until after second-quarter inflation data is released on July 25.

“That decision will be heavily dependent on global developments over the next three weeks," Mr Evans said.

Alongside the outcome in Greece, this week’s G-20 leaders summit in Mexico will be closely scrutinised for signs of action. Prime Minister Julia Gillard will attend the event.

Locally, the week kicks off with today’s ABS data on new car sales for last month, which is expected to reinforce very positive recent private sector figures.

On Wednesday the bureau releases population data for the December quarter, as well as first-quarter dwelling starts, forecast by analysts to have fallen 2.3 per cent.

The same day, Westpac is due to publish its leading index measure for April, and Reserve Bank head of payments policy Tony Richards will speak to a finance industry conference in Sydney.

The following day, the Reserve Bank releases its quarterly bulletin, and the ABS publishes the first release of data from the 2011 national census.